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ОглавлениеChapter 2
Taking Care of Yourself First: Preparing for Your Own Retirement
If you have ever been on a plane, you’ll remember the many times you’ve watched the flight attendants demonstrate emergency procedures. One of the things they always remind us to do if the oxygen masks drop down from the ceiling is to put our own mask on first, before we tend to our children and loved ones. While it is often in our nature to feel that we should help our loved ones first, it can be dangerous to do so in this instance. This is because we can’t help others breathe if we aren’t breathing ourselves. The same is true when it comes to retirement planning. We must first safely set ourselves up for success before we will be in a position to help others.
You have an obligation to ensure you will be self-sufficient in your retirement years. This means balancing your own needs with those of your children and your aging parents.
1. Is It Time for You to Retire?
Just because you have reached a particular milestone, such as years of service or age, it does not mean you have to retire. If staying in the workforce is still rewarding — even for an extra year — it can give you great financial benefits, as well as provide rewarding mental and physical stimulation. However, it is important to consider what your retirement lifestyle dreams look like.
Today’s active retirees may find they spend as much money (or more) during retirement as they did while working! The old-age stage has its expenses as well, such as moving to assisted-living residences or long-term care facilities. It’s time to really think about your hopes and dreams, and make a list of the types of activities you want to participate in throughout your retirement, from travel, to dining out, to club memberships, and more.
In addition to lifestyle expenses, think about whether you will be financially supporting a spouse or an adult child at the time of your retirement. As we’ve discussed already, there may be a likelihood that you will need to help your aging parents if they do not have sufficient funds.
Theravive, a network of counselors and clinics throughout North America, estimates that 33 percent of adult children who are caring for their aging parents are either retired or work part time.[1] This means by financially helping others, it will have a dramatic impact on your income needs.
No matter what age you are now, it’s not too late to save adequately for retirement. The following sections list helpful tips to get you started.
1.1 Tips for 50-year olds
If you haven’t yet given serious consideration to your retirement, now is the time. At age 50, there is still time to plan and save for retirement during the next 10 to 15 years. With children now leaving the family nest, and careers in full bloom, expenses are lower and income is on the rise. This is the time to take advantage and reduce your debt as well as increase your retirement account savings.
1.1a Tip 1: Paying down debt
It is very difficult to enjoy retirement when a large portion of your fixed income will go to servicing debt — especially debt accumulated during the working years! Pay off debt with the highest interest rates first, such as credit cards. Did you know that over one year, a $5,000 credit card balance with an 18 percent interest rate (a typical rate for a credit card) would cost you $900 in interest?
Once your consumer debt is paid off, it is time to reduce or pay off the remaining mortgage you have on your home or cottage.
1.1b Tip 2: Start saving
Your 50s are the ideal time to top up your registered retirement accounts (e.g., Registered Retired Savings Plans and Tax-Free Savings Accounts). This is especially true if your earnings are near their peak, since those higher earnings are taxed at a higher income tax rate!
1.1c Tip 3: Protect your family
With the children grown and gone, debt paid off, and savings accounts in good shape, you may think there is no need for insurance. Unfortunately, aging often leads to illness. Consideration should be given to two types of insurance: Critical Illness Insurance and Long-Term Care Insurance.
• Critical Illness Insurance pays a lump sum to the insured party 30 days after the diagnosis of one of a list of diseases, such as cancer, heart disease, and stroke. Coverage amounts can vary between $10,000 and $2,000,000. Proceeds from Critical Illness policies can be used in any way the insured party chooses, such as accessing high-priced health-care treatments, paying down debt, or taking that once-in-a-lifetime holiday.
• Long-Term Care Insurance helps cover the cost of long-term care, just as the name implies. This insurance pays a benefit when the insured party can no longer perform at least two of the main Activities of Daily Life (discussed in Chapter 1). The insured amount is paid monthly or weekly, and helps with the increased costs that disability can bring.
As with any insurance, it is best to engage a qualified financial planner to help you determine what coverage you need, and how much coverage is right for you and your family.
1.1d Tip 4: Spend money!
Once you have paid down your debt, topped up your savings account, and reviewed your insurance needs, don’t be afraid to spend a little money and have some fun. Your fifties may be some of the best years of your life!
1.2 Tips for 60-year olds
You are officially a senior! You qualify for all kinds of discounts, and the local pub’s Happy Hour may be your favorite way to spend the dinner hour. Now is the time to meet with your financial advisor and tax planner to look into the following tips.
1.2a Tip 1: Tax planning
It is important to take the time to understand the impact of your tax bracket. If retired, you can control where your income comes from. It is worth the effort to plan income sources in the most tax-efficient manner possible.
1.2b Tip 2: Tax credits
Keep in mind that you could be eligible for tax credits such as the personal exemption, age credit, and spousal amount. You may also qualify for disability, caregiver, and infirm dependent amounts too.
1.2c Tip 3: Income splitting
In Canada, the Federal Government now allows couples to split pension income that can dramatically reduce the family tax bill when one spouse has significantly higher pension income than his or her partner.
American readers should check with the person who prepares their income tax returns to discuss the possibility of income splitting. Each state deals with this differently.
1.2d Tip 4: Travel
Now that you are nearing retirement, or retired, visions of Freedom 55 (make that Freedom 65 for the modern couple) may be dancing in your head. If you dream of escaping the cold of Canada’s winters, be aware that there can be serious tax implications for those who overstay their welcome in the USA. As a visitor to the USA for an extended period of time, you will be required to complete Form 8840 to prove you have a closer connection to Canada than the United States. Failing this test, you will be required to file an American tax return. Also, don’t forget that if you are planning to travel for an extended period, you need to consider who will be taking care of any aging parents while you’re away.
Don’t forget to purchase emergency travel insurance before you leave. If you are a snowbird, you may want to check the price of extended travel insurance, as the annual rate can provide savings over purchasing your coverage for one trip at a time. If you rent a vehicle when you travel, call your auto and home insurer and ask if it offers collision and liability coverage on the vehicle you plan to rent while on holidays.
Now that you know the helpful tips to make sure you’re on track, it’s time to really put pen to paper and figure out if you’ll be able to retire at the age you’re hoping. Bear with me as we get into the math; as painful as it is sometimes, there is no better way to see how ready you are than by writing down the actual numbers. I promise I’ll make it as simple and painless as possible! Let’s begin by using Worksheet 2 to figure out whether or not you’ll be able to retire on time. (You can find a blank copy of this worksheet in the download kit.)
Worksheet 2: Retirement Readiness
2. Five Retirement Lifestyle Budgets
Now that you have a good idea of your retirement income sources and the savings you will be able to accumulate before you retire, take a look at the five retirement lifestyles in the following sections to see which one most closely matches your situation. The budgets demonstrate how other retirees in your income bracket allocate their funds.
Note: The five budgets are based on Statistics Canada 2001 household expenditure averages and then adjusted to suit scenarios. These budgets are samples for educational purposes only. Personal taxes assume that partners are in the same income tax bracket.
2.1 Conservative
Sample 1 describes a lifestyle that provides a modest home or rental unit in a small city. Much of your time is spent with friends and family who live nearby. Leisure time is spent gardening, playing bridge, and going for walks. Vacations are modest.
Sample 1: Conservative Lifestyle Budget
2.2 Comfortable
Sample 2 outlines the comfortable lifestyle which affords a three-bedroom house in a medium-sized city. Free time — and some money — go toward working on local community affairs and charities. Leisure time pleasures include gardening, reading novels, entertaining at home or dining out with friends and family members. This year’s trip is a one-week stay at a nearby resort.
Sample 2: Comfortable Lifestyle Budget
2.3 Above average
Sample 3 shows a lifestyle that provides a three-bedroom house in a large city. Leisure time activities include gardening, reading novels, entertaining either at home or dining out with friends and family members. Hobbies include yoga or membership at the local community tennis courts. Renting an apartment on the sandy shores of Florida for a few weeks each year brings a reprieve from the long winter months.
Sample 3: Above-Average Lifestyle Budget
2.4 Luxury
Sample 4 describes a lifestyle that enables time to be split between the long-time home in an upscale metropolitan suburb and a newly purchased condo in Florida. Leisure time is spent entertaining friends either at home or in restaurants, and with a club membership where you can enjoy tennis or golf. The big vacation this year is a two-week tour of southern France.
Sample 4: Luxury Lifestyle Budget
2.5 Prestige
Sample 5 shows a lifestyle that provides for three pieces of real estate that are owned free and clear of mortgages. They include a primary residence, cottage, and condo in the sunny south with all the amenities for a break from the cold winters, and warmer months are spent at your lakefront summer home with a fantastic country club close by that offers golf, tennis, and swimming. Much of your time is spent with close friends, entertaining at home, in restaurants, or at the club. You’ll enjoy a three-week European getaway including a spectacular cruise down the Rhine. Theater and the symphony are also passions you indulge.
Once you’ve thoroughly explored your own readiness, and set yourself up for financial success on retirement, we can get back to helping your aging parents prepare for the years ahead. In Chapter 3 we will explore the best way to get started when talking to your parents about their own wishes and needs.
